Poor households in developing countries face large and varied risks. Many agriculture-dependent households, for example, are at risk of drought- or flood-induced crop failures or livestock deaths. The death of a family member often implies having to fund expensive burial ceremonies, and if the deceased was the household’s primary earner, replacing her/his stream of income is an even bigger problem. A short “Client Math” survey by the Microinsurance Learning and Knowledge (MILK) project of Compartamos borrowers in Mexico, for instance, shows that funeral costs alone (including the costs of the funeral itself as well as connected costs such as food and drink, but excluding lost wages) typically amount to half of a family’s annual income (my calculations from data described in Poulton and Magnoni 2012). Similar figures have been reported from around the world.

Poor families have imperfect tools to manage these risks. They rely on self-insurance, traditional risk-sharing arrangements, informal insurance networks, and/or credit and savings. These strategies, however, are inflexible and/or expensive, and do not provide enough protection. There is evidence that informal risk-sharing between a husband and wife is not even guaranteed to work well (Robinson 2012, Duflo and Udry 2004). As a result, households often remain underinsured, even for mostly-predictable shocks such as death (Collins and Leibbrandt 2007).

Microinsurance —insurance targeted to the poor through low premiums and/or low coverage limits— is being developed to create a better alternative, and it should in theory be in high demand.

But the take-up of many microinsurance products remains low, even for carefully-designed and well-priced products. For example, Giesbert et al. (2011) calculated that only about 4.5% of surveyed households in Ghana held a life microinsurance policy offered through local financial institutions.

The challenge is therefore to understand why participation in microinsurance is so low, and how to increase it. Economics tells us that the price of the insurance is an important factor determining demand, but other factors have also been shown to influence purchases, such as trust in the provider and the level of salience of the risk in people’s lives (see notably Cole et al 2012).

In my job market paper, I investigate how price and information affect microinsurance coverage. I partnered with the MILK project and Compartamos Banco to implement a randomized controlled trial with 8,700 women in Mexico. Compartamos offers a term life microinsurance policy to all its village bank borrowers. The insurance is offered in modules, each providing about $1,175 of coverage for 19 weeks, at a cost of $4.50. The insurance pays out to a designated beneficiary in case of natural or accidental death of the borrower (note that this product is not a credit life insurance product, as outstanding balances are automatically forgiven if a borrower passes away). Village bank borrowers of Compartamos normally receive a coverage subsidy: Compartamos provides one module of coverage at no cost to the borrower (Compartamos pays the premium to the insurer). Borrowers who wish to increase their coverage have the option to purchase up to 7 additional modules.

I measured the influence of price on insurance coverage by eliminating the subsidized basic amount of insurance coverage in randomly-selected village banks. In the treatment group, borrowers had to purchase one or more modules to have any coverage. (Unbeknownst to the treatment group, Compartamos kept paying the premium for one module for all clients throughout the experiment, effectively maintaining the subsidy; all analyses do not include this coverage. No borrower in the sample died during the experiment.)

The influence of information on insurance coverage was studied by introducing two new marketing approaches. Both used a colorful poster designed to standardize the information provided to borrowers. One marketing message emphasized the financial toll of a funeral and how the insurance payout helps to face it (“financial poster”), while the other message emphasized the emotional toll of a funeral on the surviving family (“emotional poster”).

The results show that, as expected, individuals who did not benefit from the subsidized coverage were less likely to have insurance coverage, on average, than those who kept the benefit of the subsidy. On the contrary, the information given to clients through posters did not influence their coverage rate or amount, on average.

These average results, however, hide important heterogeneity. First, eliminating the subsidy led to a larger drop in coverage among younger borrowers than among older borrowers. This finding makes sense because the actuarial value of the policy is higher for older individuals (the price of each module of insurance does not change with the clients’ age).

Second, although information did not influence coverage on average for the entire sample, the marketing message mattered for borrowers who did not benefit from the subsidy. While borrowers did respond rationally to the price increase by reducing coverage, they were also sensitive to the marketing message they received. In addition, this sensitivity varied by the age of the borrowers:

·Uniquely among younger borrowers (17 to 29 years), those who received the emotional message were more likely to have coverage than those who received the financial message. (Although it is important to note that all borrowers were less likely to have coverage due to the elimination of the subsidy.) The “emotional” poster used the example of a woman with young children, and may have appeared more relevant to younger borrowers in a similar stage of their life cycle.

·Middle-aged borrowers (30 to 49 years), on the other hand, responded more positively to the financial information: they were more likely to have coverage when presented with the financial poster.

·The policy was valuable to older borrowers (50 to 89 years), who were not swayed by the information provided to them.

In sum, the nature of the marketing message mattered. Specific information about the product was key to helping clients understand the choice they faced and decide whether to purchase insurance coverage or not. The right information, at the right time, and to the right person can help households manage risk, in some cases by encouraging the purchase of microinsurance policies, but this experiment also shows that some kinds of marketing can sway some people to make choices that are of dubious economic value.

Jonathan Bauchet is a PhD student at New York University’s Wagner School of Public Service.